If you have a little debt, you're not alone. If you have a lot of debt, you're in good company as well — especially as a doctor.
Unfortunately, debt is a staple in modern society. For many, it's an unavoidable side effect of chasing your dreams and fulfilling your potential. (And often times just getting everyday stuff done.)
Fortunately, there are effective ways to overcome debt. One method is consolidation. So, who is debt consolidation for? Anyone with one or more of the following:
- Student loans.
- Personal loans.
- Medical bills.
- Credit card balances.
Sound like you? Then let's take a closer look at what debt consolidation is and how can you do it right now.
Debt consolidation is the process of taking out a new loan that combines multiple debts into a single, larger payment with more favorable terms.
Now, will you still owe money to a lender or credit card company? Of course. But by combining several loan balances into one, you may be able to:
Lower your overall monthly payment. You may be able to stretch out the overall terms of your loan repayment schedule, which can reduce your monthly payments. Yes, this means you will technically owe money for a longer period of time. But if you need extra cash each month, it may benefit you to lower your overall debt payments. This is especially helpful for residents paying off student loans, credit cards and other debts.
Lower your interest rate. You can also save money by consolidating multiple loans into one lower interest rate. This is heavily dependent on:
- Your current rates.
- The current rate environment.
- Your credit rating and history.
- The lender you're working with.
Simplify your finances. As a busy doctor, it’s easy to neglect various payments. It’s also easy to overdraw an account if you don’t have the time to properly manage your finances. Debt consolidation allows you to transfer three, four or even more debts into a simple monthly payment.
With these benefits in mind, here are the four different types of debt consolidation you may want to consider.
Student loan refinancing. If you need to lower your monthly student loan payment, consider refinancing options through private lenders. Refinancing student loan debt to a lower interest rate can help you:
- Reduce your monthly payments.
- Save thousands of dollars over the course of you career.
The main downside of student loan refinancing applies to those with federal student loans. Refinancing to private loans may result in losing special repayment plans that can help you in a time of need.
If you pursue this option, make sure you can comfortably afford your new payments. Compare rates from several providers to find the best deal. (Typically, you can “rate shop” for 30 days and only one inquiry will show on your credit report.)
Balance transfers. If you're done with medical school and practicing full-time, chances are your credit score is on the rise. And that opens various doors for you.
For example, you may able to:
- Qualify for credit cards with lower interest rates than you currently use.
- Transfer debt from high-interest loans and credit cards to a low-interest credit card.
- Open a balance transfer credit card with a 0 percent introductory rate for the first 12 to 18 months.
For the latter, there’s usually a transfer fee based on the amount of debt you transfer onto the card. These offers are typically for applicants with high credit ratings. Plus, once the introductory period is over, the interest rate on the remaining debt can be fairly high. Crunch the numbers to see if you can pay it down before the introductory 0 percent offer expires.
Debt consolidation loans. Another option is a debt consolidation loan or personal loan. In this scenario, you obtain a loan, either from your financial institution or an online lender. You can then use the funds to pay off the balances on your unsecured debt.
The advantage of this option is that you will get a fixed monthly payment for a fixed period. This will make it easier to manage your budget and pay down debt faster.
The downside of this option is that there will likely be origination fees. Plus, like with credit cards, the lower your credit score, the higher your interest rate.
Home equity loans. A home equity loan can be an option if you have sufficient equity in your home. If you purchased a home several years before and it’s appreciated in value, you may be able to use equity to pay off some of your high-interest debts. Home equity loans typically offer lower interest rates than other types of loans.
Still, plenty of risk lies in the fine print:
- There are usually closing costs involved, similar to when you purchase a mortgage.
- If you fail to repay the loan, you could lose your home to foreclosure.
- Removing equity from your house means it’s not available for emergency expenses or needed repairs. Plus if you need to move and sell the home, you have less money available post-sale.
- You increase the risk of being upside down on your mortgage. (This means you owe more than the home is worth, which is problematic if the real estate market declines.)
The purpose of debt consolidation is simple. It makes it easier to repay and retire existing debts without accumulating more.
Before pursuing any of these options, make sure you are well-versed in:
- The benefits of debt consolidation.
- The different type of debt consolidation.
- Risks hiding in the fine print.
Debt is crippling — whether it's from student loans, medical bills or credit cards. But it doesn't have to be.
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Joel Palmer is a writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.